THE ECONOMY: Manufacturing key to economic health

by Martin Feil

News Weekly, February 24, 2001

Industry analyst Martin Feil explains how the true state of the Australian economy is hidden from the public by the jargon and condescension of the economics fraternity. One thing that can't be masked is manufacturing's importance to the economy.

My father told me that skill in billiards was evidence of a misspent youth. My familiarity with the technical jargon of the industry policy debate in Australia might equally evidence a misspent life.

One of the great problems in the debate is that some very simple and compelling facts are often lost in a sea of verbiage that prevents non-combatants from forming a common sense opinion about the relative merits of free trade and an interventionist industry policy.

I would like to advance a few simple and incontrovertible facts and propositions that may help form your view:

* The value of the Australian dollar has halved over the past 20 years.

* Manufacturing industry's contribution to Australia's income has halved over the past 20 years.

* Complaints about dumped imports are not a whinge. Even the WTO has established processes and principles for complaints.

* Our deficit on the current account is not a healthy sign of a growing economy. We are spending the money on consumption goods and services and selling off the businesses that create export income.

There are obviously a lot more issues than these in the industry policy debate. However, it is important to establish a secure foundation for our common sense opinion, and these four home truths are frequently misrepresented and employed as arguments for free trade and the industry policy of economic rationalism and market deregulation we have employed in the last twenty years.

1. The value of the Australian dollar

What do we mean by value? The term is obviously relative. Our currency is measured simply by what we can get for it in exchange for other currencies. We can get about 55 American cents or 70 yen for our Australian dollar. Twenty years ago we could get US$1.25 or ´300.

The fact that our dollar is now worth about half of what it was worth 20 years ago has a substantial effect on the Australian economy.

It should mean that imports are twice as expensive and exports are twice as cheap (all other things being equal). The economic theory is that deflation of the currency in the long run will eventually restore the relative equilibrium of our economy. This means that the price level for imports increases and reduces demand, and the price level for exports decreases and increases demand. As exports increase and imports decrease the economy grows and the currency gets stronger.

This is very nice in theory, but in practice it hasn't happened in Australia over the past 20 years.

We have been told our currency is weak because:

* We are old economy; and/or

* We are caught in the backwash of a currency war between the US dollar and the Euro; and/or

* We are adversely influenced by our close ties to the US dollar; and/or

* Any number of short-run explanations that explain nothing about the long run phenomenon.

The answer to our currency weakness is provided by Alf Rattigan, founding Chairman of the Industries Assistance Commission (IAC), author of the 25 per cent tariff cut and the father of the Australian strain of economic rationalism.

In the 1975-76 Annual Report of the IAC (Rattigan's last report) the following categorical statements are made: "the link between the exchange rate and industry assistance has direct relevance to the development of Australia's industry policy" (page 27) and "resisting pressures for the depreciation of the exchange rate arising from continuing deficits on the balance of payments, on the other hand, becomes increasingly difficult over time unless domestic economic measures are taken to control the underlying sources of the pressures" (page 27).

There is an obvious prophetic air to this last statement. We have had continuing deficits and the exchange rate has devalued systematically against the US dollar, the British pound, the Japanese yen, the Deutschmark, the Hong Kong dollar, and the Franc. You name the currency and we have weakened against it with the exception of the banana Republics.

Alf Rattigan said the correct thing twenty-five years ago - continuing deficits in the current account will cause pressure for depreciation of the exchange rate unless we do something (i.e. in industry policy) to control the underlying sources of the pressure.

The exchange rate is, over a long period, the score card for a country's international competitiveness. Our devaluation should be regarded as demonstrating a long-term policy failure, not as a short-term blip that can be superficially accounted for by external factors.

2. Manufacturing's contribution

Again, it is extremely important to be very clear about the numbers. The Productivity Commission in its Annual Report for 2000 makes the claim that:

"The real output of the Australian manufacturing sector is now 50 per cent larger than in 1973 and manufacturing exports have increased four times in real terms."

With respect, this is deceptive statistical hocus-pocus that ignores the size of the starting point (as Khrushchev did when he said that GDP in the USSR would exceed the USA's GDP by the 1990s).

It ignores the rate of growth of Australian GDP in general and it ignores creative definitions that, for example, place wine in the category of manufactured exports. Last year, the Australian dollar value of exports of wine alone exceeded the total manufactured exports of 1973.

Finally, the Commission certainly ignores the manufacturing export contribution made by the textile, clothing and footwear (TCF) and passenger vehicle industries and the role of government in that export creation. Both of these industries have contributed billions of dollars of exports of elaborately transformed manufactures.

Some factual and appropriate analytical context is necessary.

In July 1973, which the Productivity Commission cites as its baseline year, the Australian dollar bought 1.4167 US dollars and 373.6 yen. In July 2000 the dollar bought 0.5822 US dollars and 63.65 yen. We have more than halved the value of our dollar and it is worth about a sixth of the value of the yen since 1973.

When adjusted for 1998/99 prices GDP in 72/73 was $253.832 billion or US$359.6 billion or 94.8 trillion yen.

GDP in 99/00 was $621,717 million (a rise of $262.117 billion) or US$365.1 billion (a rise of just US$5.5 billion) or 39.6 trillion yen (a fall of 55.2 trillion yen).

Put more simply, if we measure the size of the Australian domestic product in US dollars we are about the same size and if we measure it in yen we are about one third of the 1972/73 Gross Domestic Product. On a global basis, our output is falling away badly and there is no comfort at all in the assertion that the Australian manufacturing sector has grown in any sensible relative context.

In the same period, in Australian dollars, the services sector grew by about 11 times and service sector exports grew ten times compared to the Commission's estimates of one times and four times respectively for the manufacturing sector. If the statistics are placed in context it is impossible to argue that manufacturing hasn't gone backwards.

The only appropriate context is the manufacturing sector's share of GDP in percentage terms. Since 1973 that contribution has fallen from 25 to 13 per cent.

3. Dumping

The World Trade Organisation (WTO) states, categorically, that its agreements uphold the principles of binding tariffs and applying them equally to all trading partners, but they do allow exceptions. Three of these exceptions are important issues:

Firstly, "actions taken against dumping (selling at an unfairly low price)".

Secondly, "subsidies and special countervailing duties to offset the subsidies".

The WTO is mealy mouthed when it says "it does not pass judgement" on whether dumping is unfair competition. However it provides a complex and comprehensive range of definitions, policies and processes, which all member countries follow in relation to dumping complaints. These can be potent weapons in the armoury of so-called free trading nations.

My point is that dumping complaints are not an Australian invention, our legislation follows the WTO model and protocols and successful complaints have to demonstrate that goods are dumped, that there is injury to an industry and there is a causal link between the dumping and the injury.

The Hawke and Keating governments effectively stopped dumping actions by Australia. We had been the third most frequent complainant (behind the USA and the European Union). Dumping complaints today would be running at about ten per cent of the rate of the 1980s. (Schott/ICS Case Study).

I stress that this does not mean that the rate was too high in the '80s. I am emphatically of the view that it is far too low now. Manufacturers have been discouraged from seeking protection against unfair trade, so much so that the Anti-Dumping Authority was disbanded a few years ago because it had too little work to do. There was no other reason.

The WTO comment on emergency measures is also worth some attention. I note that John Conomos from Toyota has said that the Government must do something to stop imports reaching 60 per cent of the Australian market otherwise there will be no reason for local manufacturers to stay in Australia. We had a Temporary Assistance Authority for decades (it was originally the Special Assistance Authority) but it was disbanded by the zealots.

Again, it is worth emphasising that the WTO has no problem with temporary assistance - it actually specifies the circumstances and the processes. We should look very closely at initiatives designed to obtain emergency protection where substantial import surges have occurred.

The WTO allows such measures to be in place for four years generally or eight years in special circumstances.

I am sure that TCF imports, that is textile, clothing and footwear, from China would fit into this category. A lot of other countries (including the USA and the European Union) have already introduced such measures.

4. Current Account Deficit

Every growing economy needs capital and capital equipment to expand. The absolutely correct theory is that imports of capital and equipment in the short term for imports replacement, and export enhancement, are a perfectly acceptable and prudent way of growing Australia Incorporated. This reason is generally advanced as the reason for accepting our current account deficit.

The only problem is that this explanation has nothing to do with the circumstances of Australia's case. We are importing money for consumption via a massive growth in credit at the same time as we are importing consumer goods. In the past two years, Australian banks have borrowed $60 billion to fund credit card debt. We are actually dissaving in the Australian economy.

This means our aggregate level of national saving is actually lower than it was a few years ago. This fact is being advanced by some, (for example Alan Mitchell in The Australian Financial Review) as the reason why we don't deserve to keep our national assets because we haven't saved enough to pay ourselves for them.

As a Sydneyite, I am still waiting for the final irony when we are offered a public float of the Sydney Harbour Bridge. My father's generation described mugs as people who would buy the Harbour Bridge. After 60 years of paying tolls to the NSW Government it is probably just about time for it to be "privatised".

Our Current Account Deficit is not a problem for my generation. We still live in the lucky country and have enough assets to sell to ensure "not peace, but prosperity in our time". Our children will not bless us for this attitude but Chamberlain would be pleased with our extension of his thesis for the appeasement of Hitler.

The cold hard fact is that Australia's debt has increased by between $10 and $20 billion a year for the past 15 years. It is not short term, it is not an aberration, there is no great investment purpose and no ultimate economic benefit. We are simply spending more than we earn and either borrowing or selling our assets to create a balance. A day of reckoning will come.

What to do

We have to change.

That change requires us to put aside bread and circuses and hopes of winning the lottery. We have turned into a society that expects unearned income. The E-commerce frenzy proved that. It will be interesting if anyone ever tallies up the losses of small time investors in the year 2000 who really thought they could earn something for nothing without knowledge or skill.

We need to almost begin again with manufacturing. We have managed to lose our knowledge base, that vital 'hands on' experience of what is actually happening in manufacturing industry within Australia.

The good thing is that we do have time. Our parents gave us that when they built a nation that couldn't be dismantled in a day.